China’s manufacturing foreign direct investment (FDI) in the Association of Southeast Asian Nations (ASEAN) has seen rapid growth, making it a top destination for Chinese investors. However, looming US tariffs pose a significant threat to this diversification trend. The ongoing negotiations aim to address ASEAN’s trade surplus with the US and regulate Chinese involvement in ASEAN exports to the US. The surge in Chinese FDI in ASEAN is attributed to geopolitical risks and regulatory barriers, positioning China as a major foreign investor in the region.
Following the US-China trade war, ASEAN emerged as a primary destination for firms seeking to diversify their supply chains away from China. The reciprocal tariffs on ASEAN economies, which have been temporarily delayed, jeopardize this success. The negotiations aim to address ASEAN’s trade surplus with the US and limit Chinese influence in ASEAN exports to the US. Chinese firms have played a crucial role in supporting US import diversification through ASEAN export hubs, with disruptions in Chinese-owned supply chains impacting foreign-owned activities.
The absence of a clear China+1 destination has led to distributed supply chains across various sectors and countries in the region. Chinese firms have demonstrated agility in adjusting their ASEAN footprint in response to regulatory and geopolitical changes. The potential imposition of US tariffs exceeding 30% could deal a severe blow to ASEAN’s diversification momentum and China’s FDI in the region, emphasizing the need for strategic negotiation tactics to mitigate the impact.
The global context of manufacturing investment in ASEAN has witnessed significant growth, with FDI averaging $30 billion annually from 2013 to 2017 and reaching $60.8 billion in 2018. The surge in FDI was fueled by the US-China trade war in 2017 and high growth rates in ASEAN’s major economies. Chinese companies have been key players in this trend, with their contributions likely underestimated in official data due to routing through intermediary countries like Hong Kong and Singapore.
Rhodium Group’s China Cross-Border Monitor database provides insights into Chinese FDI trends in ASEAN’s manufacturing sector. The data indicates a steady increase in Chinese greenfield manufacturing FDI from 2010 to 2017, with a significant spike in 2018 in response to US tariffs on Chinese exports. The subsequent years saw a surge in Chinese FDI levels, particularly in manufacturing investments, highlighting ASEAN’s growing importance in China’s global FDI transactions.
Four key sectors—automotives, ICT and electronics, renewable energy equipment, and consumer goods—have dominated China’s FDI in ASEAN countries, accounting for over 86% of investment value. The consumer goods sector witnessed a shift offshore due to rising wages in China, with Vietnam emerging as a major destination. The electronics sector experienced a surge in investment post-US-China trade war, with Malaysia and Vietnam becoming key hubs for semiconductor and consumer electronics manufacturing.
China’s FDI in renewable energy equipment in ASEAN, particularly in solar PV manufacturing, has been influenced by global regulatory dynamics. The sector saw a significant increase in investments in response to US regulatory actions, leading to strategic shifts in production locations to avoid tariff implications. The automotive sector has also seen a rise in Chinese FDI, especially in electric vehicle manufacturing plants across ASEAN countries.
The outlook for Chinese FDI in ASEAN hinges on various factors, including the tariff differentials between ASEAN and China, US scrutiny of Chinese involvement in ASEAN supply chains, and China’s economic performance. The evolving dynamics in these areas will shape the future trajectory of Chinese investments in the region, impacting supply chain diversification and trade relationships between ASEAN, China, and the US.
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